Time value of money analysis

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I. Time Value of Money A. Calculate the following time value of money figures:

1. Calculate the present value of the company based on the given interest rate and expected revenues over time.

2. Suppose the risk of the company changes based on an internal event. Recalculate the present value of the company.

3. Suppose that a potential buyer has offered to buy this company in five years. Based on the present value you calculated above, what would

be a reasonable amount for which the company should be sold at that future time? B. What are the implications of the change in present value based on risk? In other words, what does the change mean to the company, and how would

you, as a financial manager, interpret it? Be sure to justify your reasoning. C. Based on the future value of the company that you calculated, and being mindful of the need to effectively balance portfolio risk with return, what

recommendation would you make about purchasing the company as an investment at that price? Be sure to substantiate your reasoning. Guidelines for Submission: Your paper must be submitted as a 2- to 3-page Microsoft Word document, not including your calculations, which should be completed in the Final Project Student Workbook. Use double spacing, 12-point Times New Roman font, and one-inch margins. Sources should be cited according to APA style.

http://www.sec.gov/Archives/edgar/data/354950/000035495015000008/hd-212015x10xk.htm

I have completed requirement 1.

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Running Head: TIME VALUE OF MONEY 1 Present Value of the company at 8% hurdle rate Interest Rate 8% FCF1 Amounts* Pv* Total Pv* *In millions FCF2 FCF3 FCF4 FCF5 113 111 108 101 97 (104.63) ($95.16) ($85.73) ($74.24) ($66.02) 425.78 FV Table 1.1: PV at 8% $625.61 To calculate the PV of the company in 2014, the cost of capital is obtained from the the year 2015 to 2018 from the financial report of Home Depot (HD-2.1.2015-10-K, 2017). The cash flow from 2015 to 2018 obtained were $113 millions, $ 111 millions, $ 108 millions, $101 million and $97 millions respectively. The PV of cash flow at 8% cost of capital is $ 425.78 millions. Present Value of Company at 10% hurdle rate Interest Rate 10% FCF1 Amounts* Pv* Total Pv* *In millions FV $651.96 Table 1.2: PV at 10% FCF2 FCF3 FCF4 FCF5 113 111 108 101 97 (102.73) ($91.74) ($81.14) ($68.98) ($60.23) 404.82 TIME VALUE OF MONEY 2 With the increase in the discount rate from 8% to 10% which result in the decrease of the present value from $ 425.78 to $ 404.82. This is beacuse a higher interest rate means you have to set less aside today to earn a specific amount in future.
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Running Head: TIME VALUE OF MONEY

1

Time Value of Money
Author
Institution

TIME VALUE OF MONEY

2

Present Value of the company at 8% hurdle rate
Interest Rate

8%
FCF1

Amounts*
Pv*

Total Pv*
*In millions

FCF2

FCF3

FCF4

FCF5

113

111

108

101

97

(104.63)

($95.16)

($85.73)

($74.24)

($66.02)

425.78

FV
Table 1.1: PV at 8%

$625.61

To calculate the PV of the company in 2014, the cost of capital is obtained from the the year
2015 to 2018 from the financial report of Home Depot (HD-2.1.2015-10-K, 2017). The cash
flow from 2015 to 2018 obtained were $113 millions, $ 111 millions, $ 108 millions, $101
million and $9 7 millions respectively. The PV of cash flow at 8% cost of capital is $ 425.78
millions.
Present Value of Company at 10% hur...